‘Lower savings, tariff increases.’

PRETORIA – Eskom increased its planned borrowings in 2016/17 dramatically by R21.7 billion to R68.5 billion, not because it accelerated its new build programme, but due to lower net savings than earlier anticipated and lower than expected tariffs during the current tariff period that ends on March 31, 2018.

This was disclosed in the 2016 Budget Review issued with Finance Minister Pravin Gordhan’s 2017 Budget Speech on Wednesday.

By December last year Eskom had utilised R187 billion of its R350 billion government guarantee. Government has extended the guarantee, due to expire in March this year, for another six years to enable it to complete its new build programme.

Eskom’s draw down on its guarantees is expected to grow to R218.2 billion by the end of the 2016/17 financial year.

National Energy Regulator Nersa has consistently granted Eskom materially lower revenue than it applied for, mostly on the basis of a lack of prudency.

Currently the 9.4% interim tariff increase it was granted last year, as well as further interim revenue allocations totaling R42 billion, are in jeopardy due to a court challenge of Nersa’s application of the Regulatory Clearing Account (RCA) methodology.

The RCA methodology allows Eskom to claw back bigger than expected expenses and lower revenue in previous periods, mostly if it resulted from factors outside of Eskom’s control.

A group of energy intensive users from Nelson Mandela Bay last year obtained a High Court order that set aside the 9.4% increase. Eskom and Nersa have appealed the ruling and until the appeal has been finalised, Nersa has shelved the R42 billion further revenue applications.

As a result, Eskom is expected to get only a 2.2% average tariff increase this year. Nersa is set to announce its decision in this regard on Thursday.

Eskom has not been prepared to comment publicly about the possible negative impact of such a small increase on its finances, but Moneyweb has spoken to various Eskom officials who are deeply concerned about the situation.

Treasury officials confirmed to Moneyweb on Wednesday that a 2.2% tariff increase would similarly force Eskom to review and increase its borrowings for the coming financial year substantially.

If the court appeal is dismissed, Eskom would further have to return the revenue that was based on the 9.4% additional increase last year to its clients in some way or another.

In the budget speech, Treasury warned that the scale of tariff hikes as well as municipal debt, which stood at R9.7 billion in December, “will affect Eskom’s financial position”.

Gordhan named “greater private-sector participation in sectors dominated by public enterprises” as one of five critical government priorities in working with the private sector and social partners towards inclusive growth.

In line with president Jacob Zuma’s statement during his State of the Nation Address (Sona) that Eskom will sign Power Purchase Agreements (PPAs) with Independent Power producers (IPPs) in accordance with the Department of Energy’s Renewable Energy Independent Power Producer Procurement Programme (REIPPP), Gordhan named the continuance of the REIPPP programme and expanding it to the gas sector, as one of several “specific imperatives” to boost investment.

The South African Renewable Energy Council (SAREC) has said in a statement issued after the Sona that Eskom is still dragging its feet in the issuing of Budget Quotes that are a precursor for the signing of PPAs.

Organisation Undoing Tax Abuse (Outa) this week announced that it has laid a complaint with the Competition Commission alleging that Eskom’s effective obstruction of the IPPs boils down to abuse of its dominant market position, which constitutes a transgression of the Competition Act.

Read Outa files complaint against Eskom with CompCom

Government’s contingent liabilities with regard to IPPs will amount to R125.8 billion by the end of March and is expected to decline to R104.1 billion in 2019/20.

The total government commitment to buy power from IPPs amounts to R200 billion.

To read Pravin Gordhan’s full budget speech, please click here.